We’ve written before about the global trend towards online shopping.  As you have most likely experienced, online shopping is becoming increasingly popular and mainstream.  Traditional retailers recognise its potential and are rapidly building their own online presence to enhance their customers’ shopping experience and also compete with pure online retailers. 

The following information does not take into account your personal objectives, financial situation or needs. You should consider if the relevant investment is appropriate having regard to your own objectives, financial situation and needs. 

 

Although, there is likely to always be shopping conducted at the store front given this is an experience many consumers enjoy, the reality is that, consumers are busier than ever and online allows them to shop quickly and efficiently – they can easily compare prices, research products and services and have those products delivered to their desired address.  For many consumers seeking convenience and in many cases, better prices, there is little room left for the sentiment of shopping at traditional store fronts.

Australia’s online shopping scene

In Australia, traditional retailers are facing similar competitive pressures from pure online retailers and have responded by increasing their own online offerings to appease their customer base.  For example, JB Hi-Fi launched JB Hi-Fi Now, in July 2014 as a digital platform to sell digital content such as music, movie, games and books.

Their online success has been mixed, particular when compared to the inroads that international online retailers have made in the domestic market.  It’s not uncommon for consumers to be directly ordering products and services from international online retailers such as Amazon.com, Ebay, Alibaba.com, Expedia or ASOS and bypassing shopping at domestic sites.

Australia has produced several successful pure online retailers of its own, some in niche industries where there is perceived to be less competition from traditional retailers.  Examples of these include:

• The Iconic, an online fashion retailer that offers a suite of Australian and international designers and brands
• Gumtree, an online marketplace focused on local communities that is now in 76 cities in 11 countries
• Red Balloon, an online service offering over 3,000 ‘experiences’ and products to consumers from over 1,000 suppliers
• Appliances Online, an online retailer of electrical appliances and white goods
• Kogan.com, an online retailer which originally sold televisions but has added other categories over recent years

There are numerous other examples of home-grown success stories in online retailing and in recent years, we have seen some of these companies list on the Australian domestic market.  Australian investors have been largely supportive of these listings as they seek exposure to the online shopping thematic.

However, as the following table and chart demonstrate, their experience in supporting these listings has been far from profitable.

 

With the recent IPO of Kogan.com being another example of an online retailing IPO that has disappointed, it begs the question of what have been the issues with the performance of these IPOs?  This is particularly pertinent when recent IPOs of other technology companies such as Wisetech Global and ApplyDirect have performed well.

Whilst it is difficult to generalise as each company has its specific reasons, we believe there are several factors:

• Valuations have been too high at the time of listing – Kogan.com listed recently with a forecasted 2017 P/E of 67.2x whereas the other 3 IPOs did not even forecast any positive net earnings in their forecast periods. As discussed in the next section, these valuations look rich against not only traditional retailers but international online retailers such as Amazon.com and Alibaba
• High growth has been forecasted but has largely failed to deliver to date. In the cases of both Surfstitch and Temple & Webster, the promises of growth at the time of IPO proved too much to meet as both companies have issued earnings downgrades since their listings (as well as new management teams)
• Overall, these companies have lacked scale as their market valuations would suggest – although building scale is not necessarily a precursor to share price appreciation, it does allow online retailers to benefit from cost efficiencies such as procurement and logistics that will ultimately lead to better profitability

In some of these cases, some of these businesses have been ‘packaged’ together by buying other complementary businesses just prior to IPO to add both scale and forecasted growth.  Unfortunately, some these acquired businesses have not had the time to be properly integrated and managed, thus resulting in writedowns and earnings downgrades.

It’s time to invest overseas

Although the size of the Australian online retailing sector is growing, it remains small in a global context – online retail spending reached A$17 billion in early 2015 and has been estimated to be as high as A$22 billion and optimistically, it is perhaps even higher.  But compare that to Amazon.com alone – in 2015, Amazon.com generated US$107 billion in revenue and expects to grow this by another US$65 billion by 2017.

With the lack of investment opportunities in the Australian public markets in the online retailing space, it makes sense to look offshore to not only access significantly larger markets but also access international online retailing companies who have the scale and global footprint to successfully compete with the traditional retailers.  Some pertinent examples include:

As the above table shows, not only do these online retailers have significant scale but they are global market leaders with high revenue and profit growth and valuations that are surprisingly reasonable when compared to the Australian IPOs listed above.

 

AtlasTrend manages a global equities fund investing in international companies at the forefront of online shopping. For the full list of companies the fund invests in, sign up to AtlasTrend for free.